Thursday, 7 June 2012

A team from the International Monetary Fund (IMF) visited Lilongwe
during May 23-June 6, 2012 for discussions with Malawi’s new government,
in the context of the 2012 Article IV consultation and the authorities’
intention to request a new three year arrangement under the IMF’s
Extended Credit Facility (ECF)1.
The mission was received by Her Excellency President Joyce Banda, and
held discussions with Minister Ken Lipenga (Finance), Governor Charles
Chuka (Reserve Bank of Malawi), Deputy Minister Khwauli Msiska (Economic
Planning and Development), Secretary to the Treasury Randson Mwadiwa,
and other senior government and RBM officials, members of the Budget and
Finance Committee of the National Assembly, as well as with
representatives of Malawi’s international development partners, civil
society, and the banking and business communities. The mission is
grateful to the authorities for the constructive spirit in which
discussions were held and for their warm hospitality.
At the conclusion of the mission, Mr. Tsidi Tsikata, mission chief for Malawi, issued the following statement:
“We congratulate President Banda on her assumption of the office of
Head of State and applaud the smooth transition to the new
administration following the unexpected death of President Bingu wa
Mutharika in early April 2012. We extend our condolences to the
Mutharika family and the nation at large.
“The mission has reached staff-level understandings with the
authorities on an economic program for the fiscal years 2012/13–2014/15
that could be supported by a new ECF arrangement in the amount of SDR104
million (about US$157 million). The new arrangement is subject to
approval by the IMF’s Executive Board which is expected to consider the
authorities’ request in July 2012. The new arrangement will replace the
three-year arrangement approved in February 2010 which the authorities
have requested be cancelled in order to start on a clean slate.
“During our last visit to Malawi two months ago, the country was
facing a severe foreign exchange shortage that was slowing down economic
activity, as several enterprises scaled down their operations for lack
of imported inputs, and fuel shortages disrupted transportation services
and energy supplies, with ripple effects across all sectors. A growing
stock of payments arrears had led to loss of external credit lines and a
negative outlook for a speedy recovery. While the foreign exchange
situation was triggered by a fall in the country’s tobacco earnings and
aid inflows in 2011, the authorities’ response to these shocks—a small
devaluation accompanied by a tightening of restrictions on foreign
exchange transactions—created distortions which fostered a parallel
foreign exchange market and boosted informal activity at the expense of
the formal economy, with adverse consequences for government revenues.
Moreover, the official exchange rate failed to anchor inflation
expectations as a growing share of imports was being priced at the
significantly depreciated parallel market exchange rate.
“The new government has moved swiftly and boldly to change the policy
environment and begin to address Malawi’s chronic imbalance between
foreign exchange earnings on the one hand, and the demand for foreign
exchange on the other. A devaluation that increased the price of foreign
exchange by nearly 50 percent, the adoption of a floating exchange rate
regime, and the lifting of several restrictions on foreign exchange
transactions have virtually eliminated the parallel market. Judicious
intervention in the foreign exchange market by the Reserve Bank of
Malawi (RBM) has helped clear some of the backlog of external payments
while tightening liquidity conditions in the domestic market. The
mission found overwhelming support in the private sector for the policy
changes: exporters welcomed the boost to their incomes in local currency
terms, importers were optimistic about the prospects for increased
availability of foreign exchange to support a recovery in economic
activity, and banks reported increased purchases of foreign exchange
from customers. All stressed the importance on improving the investment
climate in order to strengthen Malawi’s international competitiveness
relative to countries in the sub-region. The policy changes have also
been welcomed by Malawi’s development partners who have pledged to
substantially increase their support to the FY2012/13 budget.
“The mission discussed the critical role of appropriate fiscal and
monetary policies for avoiding an inflation spiral and realizing the
expected benefits from the recent policy actions. To that end, the
objectives of the program to be supported by the new ECF arrangement
include fiscal sustainability and a gradual build up of international
reserves to help cushion the economy against external shocks. More
broadly, the program will guide the implementation of policies to create
the stable macroeconomic environment needed to achieve the main
objective of the second Malawi Growth and Development Strategy (MGDS II)
of reducing poverty through sustained private sector led growth and
wealth creation.
“The FY2012/13 budget will be an important vehicle for implementing
the ECF-supported program. The government is giving high priority to
ensuring adequate provisions for scaling up social protection programs
in the budget to mitigate the impact of the devaluation on the welfare
of the most vulnerable segments of the population. Fiscal discipline
will be required to keep overall government spending within the
available resource envelope while protecting the government’s top
priorities and avoiding the recent history of excessive domestic
borrowing and the accumulation of huge domestic arrears. Monetary policy
will be geared toward achieving price stability, while providing room
for growth in credit to the private sector. The authorities have agreed
on limits to the government’s total borrowing from the RBM and on steps
to enhance the operational independence of the RBM.
“The mission expressed concern over significant and growing risks to
public finances from the operations of state-owned enterprises and the
setting of prices and tariffs below cost recovery levels. In this
regard, the mission welcomed the recent changes to the pricing and
taxation of petroleum products and the adoption of an automatic
adjustment mechanism to ensure that retail prices of these products
reflect the true cost of importation. If the new rules are adhered to,
fuel prices should move up and down in line with world prices. In order
to contain fiscal risks from the operations of the National Oil Company
of Malawi (NOCMA), the mission urged the authorities to limit its
operations to its mandate of managing the country’s strategic fuel
reserves and to revert to reliance on the private sector for the
importation of fuel to meet the country’s regular consumption needs.
“The mission discussed the issue of data integrity following the
recent revelation that the Ministry of Finance inflated revenue data
reported to parliament in the context of the midyear review of the
budget earlier this year. The mission recommended that henceforth the
Malawi Revenue Authority report information on its monthly revenue
collections directly to the public and not just to the Ministry of
Finance. The authorities requested technical assistance from the IMF and
other partners to improve the quality of a wide range of economic
statistics.”

1
The Extended Credit Facility (ECF) has replaced the Poverty Reduction
and Growth Facility (PRGF) as the IMF’s main tool for medium-term
financial support to low-income countries. It provides for a higher
level of access to financing, more concessional terms, enhanced
flexibility in program design, and more focused, streamlined
conditionality. Financing under ECF currently carries a zero interest
rate, with a grace period of 5½ years, and a final maturity of 10 years.